Unionbank v.

DBP
GR No. 191555, 2014-01-20
January 20, 2004

FACTS:
Foodmasters, Inc. (FI) had outstanding loan obligations to both Union Bank's predecessor-in-interest, Bancom
Development Corporation (Bancom), and to DBP.
On May 21, 1979, FI and DBP, among others, entered into a Deed of Cession of Property In Payment of
Debt[7] (dacion en pago) whereby the former ceded in favor of the latter certain properties (including a
processing plant in Marilao, Bulacan
[processing plant]) in consideration of the following: (a) the full and complete satisfaction of FI's loan
obligations to DBP; and (b) the direct assumption by DBP of FI's obligations to Bancom in the amount of
P17,000,000.00
DBP also entered into a separate agreement with Bancom (Assumption Agreement) whereby the former: (a)
confirmed its assumption of FI's obligations to Bancom; and (b) undertook to remit up to 30% of any and all
rentals... due from FI to Bancom (subject rentals) which would serve as payment of the assumed obligations,
to be paid in monthly installments.
Meanwhile, on May 23, 1979, FI assigned its leasehold rights under the Lease Agreement to Foodmasters
Worldwide, Inc. (FW);[11] while on May 9, 1984, Bancom conveyed all its receivables, including, among
others, DBP's assumed obligations, to Union Bank.
Claiming that the subject rentals have not been duly remitted despite its repeated demands, Union Bank filed,
on June 20, 1984, a collection case against DBP before the RTC, docketed as Civil Case No. 7648.[13]In
opposition, DBP countered, among others,... that the obligations it assumed were payable only out of the rental
payments made by FI. Thus, since FI had yet to pay the same, DBP's obligation to Union Bank had not arisen.
[14] In addition, DBP sought to implead FW as third party-defendant in its... capacity as FI's assignee and,
thus, should be held liable to Union Bank.
In a Consolidated Order[30] dated October 15, 2001 (Order of Execution), the RTC granted both motions for
execution. Anent Union Bank's motion, the RTC opined that the CA's ruling that DBP's payment to Union Bank
shall be demandable only upon payment of FW... must be viewed in light of the date when the same was
rendered. It noted that the CA decision was promulgated only on May 27, 1994, which was before the
December 29, 1998 due date within which DBP had to fully pay its obligation to Union Bank under the
Assumption Agreement.
Since the latter period had already lapsed, "[i]t would, thus, be too strained to argue that payment by DBP of its
assumed obligation[s] shall be dependent on [FW's] ability, if not availability, to pay."[31] In similar regard, the
RTC granted DBP's motion... for execution against FW since its liability to Union Bank and DBP remained
undisputed.
As a result, a writ of execution[32] dated October 15, 2001 (October 15, 2001 Writ of Execution) and,
thereafter, a notice of garnishment[33] against DBP were issued. Records, however, do not show that the
same writ was implemented... against FW.
the Court: (a)  nullified the October 15, 2001 Writ... of Execution and all related issuances thereto; and (b)
ordered Union Bank to return to DBP the amounts it received pursuant to the said writ.[40]
On September 13, 2005, Union Bank filed a Manifestation and Motion to Affirm Legal Compensation,[43]
praying that the RTC apply legal compensation between itself and DBP in order to offset the return of the funds
it previously received from DBP. Union Bank... anchored its motion on two grounds which were allegedly not in
existence prior to or during trial, namely: (a) on December 29, 1998, DBP's assumed obligations became due
and demandable;[44] and (b) considering that FWI became non-operational and... non-existent, DBP became
primarily liable to the balance of its assumed obligation, which as of Union Bank's computation after its claimed
set-off, amounted to P1,849,391.87.
ISSUE:
The sole issue for the Court's resolution is whether or not the CA correctly upheld the denial of Union Bank's
motion to affirm legal compensation.
RULING:
The petition is bereft of merit.
Compensation is defined as a mode of extinguishing obligations whereby two persons in their capacity as
principals are mutual debtors and creditors of each other with respect to equally liquidated and demandable
obligations to which no retention or controversy has been timely... commenced and communicated by third
parties.[53]  The requisites therefor are provided under Article 1279 of the Civil Code which reads as follows:
Art. 1279.  In order that compensation may be proper, it is necessary:
(1)
That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the
other;
(2)
That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and
also of the same quality if the latter has been stated;
(3)
That the two debts be due;
(4)
That they be liquidated and demandable;
(5)
That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor. (Emphases and underscoring supplied)
The rule on legal[54] compensation is stated in Article 1290 of the Civil Code which provides that "[w]hen all
the requisites mentioned in Article 1279 are present, compensation takes effect by operation of law, and
extinguishes both... debts to the concurrent amount, even though the creditors and debtors are not aware of
the compensation."
In this case, Union Bank filed a motion to seek affirmation that legal compensation had taken place in order to
effectively offset (a) its own obligation to return the funds it previously received from DBP as directed under the
September 6, 2005 Writ of Execution... with (b) DBP's assumed obligations under the Assumption Agreement.
However, legal compensation could not have taken place between these debts for the apparent reason that
requisites 3 and 4 under Article 1279 of the Civil Code are not present.
Since DBP's assumed obligations to Union Bank for remittance of the lease payments are in the Court's words
in its Decision dated January 13, 2004 in G.R. No. 155838 "contingent on the prior payment thereof by [FW] to
DBP," it cannot be said that both debts are due
(requisite 3 of Article 1279 of the Civil Code). Also, in the same ruling, the Court observed that any deficiency
that DBP had to make up (by December 29, 1998 as per the Assumption Agreement) for the full satisfaction of
the assumed obligations "cannot be determined until... after the satisfaction of Foodmasters' obligation to
DBP." In this regard, it cannot be concluded that the same debt had already been liquidated, and thereby
became demandable (requisite 4 of Article 1279 of the Civil Code).
Since, as already stated, the monthly installments for the payment of the P17 million debt are to be funded
from the lease rentals, it follows that if the lease rentals are not paid, there is nothing for DBP to remit to [Union
Bank], and thus [DBP] should not be considered... in default.
A careful reading of the decision shows that the Court of Appeals, which was affirmed by the Supreme Court,
found that only the balance or the deficiency of the P17 million principal obligation, if any, would be due and
demandable as of December 29, 1998. Naturally, this... deficiency cannot be determined until after the
satisfaction of Foodmasters' obligation to DBP, for remittance to Union Bank in the proportion set out in the
1994 Decision.
In fine, since requisites 3 and 4 of Article 1279 of the Civil Code have not concurred in this case, no legal
compensation could have taken place between the above-stated debts pursuant to Article 1290 of the Civil
Code. Perforce, the petition must be denied, and the denial of
Union Bank's motion to affirm legal compensation sustained.